Managing the Latin Debts

November 23, 1985

In the long and arduous struggle to get control of the Latin American debts, the most difficult part of the job falls necessarily to the Latin countries themselves. Austerity alone won't suffice. They are going to have to change some bad habits that have become entrenched in their political systems. Jacques de Larosiere, the managing director of the International Monetary Fund, touched on the subject a few days ago in a speech that surveyed the prospects for recovery.

He observed that debtors and creditors have made substantial progress in handling these debts. The Latins have greatly increased their export earnings, and their economies have begun to grow again. But nothing has been finally resolved.

Here in the United States, because of the crucial role of the American banks, attention has been fixed on the amounts of money to be supplied. But the amounts required will depend on structural reform in the Latin economies. While everyone wants to see sustained growth, Mr. de Larosiere said, "the conditions and policies necessary to achieve it are not yet in place in many indebted countries."

He didn't spell out the point. But most Latin countries follow the tradition of heavily protecting their manufacturing sectors. Inefficient yet profitable because of the protection, these industries become sources of patronage jobs and funds to support the political parties on whose intercession they have learned to live. Governments also try to please consumers by keeping their currency exchange rates too high. In the decade up to the summer of 1982, most of the Latin countries borrowed heavily abroad to support their exchange rates and to meet the budgets of their protected enterprises. The music stopped when Mexico ran out of money to service its debt.

There are many ways to rebalance these economies and keep them expanding strongly. But none is possible with exchange rates at unrealistic levels or with the featherbedding visible in protected industries with political connections. Adjustments so far have mainly been simple reductions in consumption, the effects of which have fallen most heavily on the poor. Systematic reform of exchange rates and a turn to more open trading will have impacts reaching higher on the social and political ladder.

The United States has its own responsibilities here, as Mr. de Larosiere also noted. It has to get its budget deficit down. That will reduce interest rates worldwide and diminish the impulse toward protectionism. Mr. de Larosiere is too tactful to go further. But it would be a melancholy irony if the Latin American debt crisis were succeeded by a larger, and even more dangerous, U.S. debt crisis.